The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels Not Sofas

Quispe Torreblanca E G, Stewart N, Gathergood J, Loewenstein G. The red, the black, and the plastic: paying down credit card debt for hotels not sofas. Management Sci., Forthcoming

103 Pages Posted: 19 Sep 2017 Last revised: 10 Feb 2019

See all articles by Edika Quispe-Torreblanca

Edika Quispe-Torreblanca

University of Oxford - Said Business School

Neil Stewart

Warwick Business School, University of Warwick

John Gathergood

University of Nottingham - School of Economics

George Loewenstein

Carnegie Mellon University - Department of Social and Decision Sciences

Date Written: August 14, 2018

Abstract

Using transaction data from a sample of 1.8 million credit card accounts, we provide the first field test of a major prediction of Prelec and Loewenstein’s (1998) theory of mental accounting: that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Consistent with this prediction, we found that repayment of debt incurred for non-durable goods is an absolute 10% more likely than repayment of debt incurred for durable goods. The strength of this relationship is comparable to an increment in 15 percentage points in the credit card APR. Our results have managerial implications not only for the structuring of financial transactions (e.g., that credit card customers should be given the option of paying off specific purchases), but more general implications for exploiting variations in the pain of paying in incentive schemes aimed at customers and employees.

Keywords: mental accounting, credit cards, debt repayment

JEL Classification: D14, D91

Suggested Citation

Quispe-Torreblanca, Edika and Stewart, Neil and Gathergood, John and Loewenstein, George F., The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels Not Sofas (August 14, 2018). Quispe Torreblanca E G, Stewart N, Gathergood J, Loewenstein G. The red, the black, and the plastic: paying down credit card debt for hotels not sofas. Management Sci., Forthcoming. Available at SSRN: https://ssrn.com/abstract=3037416 or http://dx.doi.org/10.2139/ssrn.3037416

Edika Quispe-Torreblanca

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Neil Stewart

Warwick Business School, University of Warwick ( email )

Gibbet Hill Road
Coventry, West Midlands CV4 8UW
United Kingdom

HOME PAGE: http://www.stewart.warwick.ac.uk

John Gathergood (Contact Author)

University of Nottingham - School of Economics ( email )

Sir Clive Granger Building
University Park
Nottingham, NG7 2RD
United Kingdom

HOME PAGE: http://https://sites.google.com/site/gathergoodjohn/

George F. Loewenstein

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States
412-268-8787 (Phone)
412-268-6938 (Fax)

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